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Chapter 8 (Regional economic Integration)

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sivirocu's version from 2015-06-10 08:48

Section 1

Question Answer
Regional economic integrationrefers to agreements between countries in a geographic region to reduce tariff and non‐tariff barriers to the free flow of goods, services, and factors of production between each other
Regional economic integrationIn theory, benefits all members
Regional economic integration•Over the last two decades, the number of regional trade agreements has been on the rise
Is regional economic integration a good thing?While regional trade agreements are designed to promote free trade, there is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other
Is regional economic integration a good thing?• If this scenario materializes, the gains from free trade within blocs could be offset by a decline in trade between blocs
Levels of Economic Integration1. Free trade area
Levels of Economic Integration2. Customs union
Levels of Economic Integration3. Common market
Levels of Economic Integration4. Economic union
Levels of Economic Integration5. Political union
1. Free trade areaall barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers
1. Free trade area• This is the most popular form of integration
1. Free trade area• Examples include • the European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland) • the North American Free Trade Agreement (NAFTA) (between the U.S., Canada, and Mexico)
2. Customs unioneliminates trade barriers between member countries and adopts a common external trade policy
2. Customs unionMost countries that enter a customs union desire further integration in the future
2. Customs union• Examples include • the Andean Pact (between Bolivia, Columbia, Ecuador, Venezuela, and Peru)
3. Common marketno barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production
3. Common marketThis type of integration can be difficult to achieve and requires significant harmony among members in fiscal, monetary, and employment policies
3. Common market• Examples include • MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay) hope to achieve this status
4. Economic unioninvolves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries’ tax rates, and a common monetary and fiscal policy
4. Economic unionThis level of integration involves sacrificing a significant amount of national sovereignty
4. Economic union• Examples include • the European Union (EU)
5. Political unionindependent states are combined into a single union
5. Political unionThis requires that a central political apparatus coordinate economic, social, and foreign policy for member states
5. Political union• The EU is headed toward at least partial political union, and the United States is an example of even closer political union
memorize

Section 2

Question Answer
The Case for Regional IntegrationThere are both economic and political arguments supporting regional economic integration
The Case for Regional Integration• Generally, many groups within a country oppose the notion of economic integration
The Economic Case for IntegrationRegional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO
The Economic Case for Integration• Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration
The Political Case for Integration• by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease
The Political Case for Integration• by linking countries together, they have greater clout and are politically much stronger in dealing with other nations
Impediments to Integration1. it can be costly ‐ while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose
Impediments to Integration2. it can result in a loss of national sovereignty
The Case Against Regional IntegrationRegional economic integration only makes sense when the amount of trade it creates exceeds the amount it diverts
The Case Against Regional Integration• Trade creation occurs when low cost producers within the free trade area replace high cost domestic producers
The Case Against Regional Integration• Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers
• Trade creationoccurs when low cost producers within the free trade area replace high cost domestic producers
• Trade diversionoccurs when higher cost suppliers within the free trade area replace lower cost external suppliers
Regional Economic Integration in Europe• the European Union with 28 members
Regional Economic Integration in Europe• the European Free Trade Association with 4 members • (Liechtenstein, Iceland, Norway, and Switzerland)
Regional Economic Integration in Europe• The European Union is expected to become a superpower of the same order as the United States
Evolution of the European UnionThe European Union (EU) is the result of • the devastation of two world wars on Western Europe and the desire for a lasting peace • the desire by the European nations to hold their own on the world’s political and economic stage
Evolution of the European Union• The forerunner of the EU was the European Coal and Steel Community (formed in 1951)
Evolution of the European Union• The Treaty of Rome established the European Economic Community in 1957 • The name was changed to the EU in 1994
in 1957The Treaty of Rome established the European Economic Community
In 1994• The name was changed to the EU
four main institutions of the EU are1. the European Commission ‐ proposes EU legislation, implements it, and monitors compliance
four main institutions of the EU are2. the European Council ‐ the ultimate controlling authority within the EU
four main institutions of the EU are3. the European Parliament ‐ debates legislation proposed by the commission and forwarded to it by the council
four main institutions of the EU are4. the Court of Justice ‐ the supreme appeals court for EU law
Single European Act(1987) committed EC countries to work toward establishment of a single market by 1992
Single European Act• The Act was born out of frustration among EC members that the community was not living up to its promise
Single European Act proposed to• remove all frontier controls between EC countries
Single European Act proposed to• apply the principle of mutual recognition to product standards
Single European Act proposed to• open procurement to non‐national suppliers
Single European Act proposed to• lift barriers to competition in retail banking and insurance
Single European Act proposed to• remove all restrictions on foreign exchange transactions between member countries
Single European Act proposed toabolish restrictions on cabotage (especially airlines)
Single European Act prompted the restructuring of substantial sectors of European Industry
Maastricht Treaty(1991) committed EU members to adopt a single currency, the euro
The Establishment of the Euro• The euro is used by 17 of the 28 member states
The Establishment of the Euro• This has created the euro zone, the second largest currency zone in the world after that of the U.S. dollar
The Establishment of the Euro• Countries that participate have agreed to give up control of their monetary policy
The Establishment of the Euro• So far, Britain, Denmark and Sweden have opted out of the euro zone
What are the benefits of the euro?Firms and individuals should save by handling one currency, rather than many
What are the benefits of the euro?• Consumers should find it easier to compare prices across Europe
What are the benefits of the euro?• Producers should become more efficient as they reduce their production costs in order to maintain their profit margins
What are the benefits of the euro?• The highly liquid pan‐European capital market should get a strong boost
What are the benefits of the euro?• The range of investment options open both to individuals and institutions should increase
What are the costs of the euro?Membership in the euro zone implies that nations lose control over the monetary policy
What are the costs of the euro?• The European Central Bank (ECB) was established to manage monetary policy, but some question its ability to act independently
What are the costs of the euro?The EU is not an optimal currency area (an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro‐economic policy)
What are the costs of the euro?• So, countries may react very differently to changes in the euro
optimal currency areaan area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro‐economic policy
The Establishment of the EuroSince its establishment the euro has had a volatile trading history with the U.S. dollar
Enlargement of the European UnionTen countries joined in 2004 expanding the EU to 28 states, with population of 450 million people, and a single continental economy with a GDP of €11 trillion
Regional Economic Integration in the Americas• The most significant attempt is the North American Free Trade Agreement (NAFTA)
Regional Economic Integration in the AmericasOther agreements include • the Andean Community • MERCOSUR
Regional Economic Integration in the Americas• There are also attempts to form a Free Trade Area of the Americas
The North American Free Trade Agreement (NAFTA)between the U.S., Canada, and Mexico became law in 1994
NAFTA• abolished tariffs on 99 percent of goods traded
NAFTA• removed barriers on the cross‐border flow of services
NAFTA• protects intellectual property rights
NAFTA• allows each country to apply its own environmental standards
NAFTA• establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
memorize